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Goldman Sachs, the second largest investment bank in the world, has predicted that the United States Federal Reserve could cut interest rates twice in the next two years, starting from as early as 3Q 2024. With the much-anticipated Bitcoin halving event expected in April, the crypto market could see a strong catalyst forming.
Interest rates have a strong correlation to investors’ risk appetite. Goldman Sachs earlier predicted the first Fed rate cut by December 2024; however, this forecast has been brought forward to the third quarter of 2024 due to cooling inflation, Reuters reported on Dec. 11.
The lender expects the two Fed cuts to bring interest rates to 4.875% by the end of 2024, compared to its previous forecast of 5.13%.
The change comes as data released on Dec. 8 showed stronger-than-expected U.S. labor market results after the U.S. Labor Department’s monthly jobs report showed the unemployment rate fell to 3.7% from 3.9% in October.
A report by Reuters cited traders saying that a more robust labor market performance won’t deter the Fed from cutting interest rates. They expect the first cut to come by the first quarter of 2023, two quarters earlier than Goldman Sachs’ forecast for 3Q.
A passage from Goldman Sachs’ note on Fed interest cut rates reads:
“Healthy growth and labor market data suggest that insurance cuts are not imminent… But the better inflation news does suggest that normalization cuts could come a bit earlier.”
The federal funds rate is determined by the Federal Open Markets Committee and serves as a guide for lending by U.S. banks. It is configured as a range bounded by an upper and lower bound. Currently, the federal funds rate ranges from 5.25% to 5.50%.
When Fed interest rates drop, borrowing becomes cheaper, fostering an increased appetite for risk-taking among traders in the economy and financial markets, including cryptocurrencies. An increase in interest rates is often used to contain inflation and reduce the purchasing power of fiat currencies, deterring capital flow into the crypto market.
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Federal Reserve interest rate hikes directly impact the crypto market because they can influence investor behavior. When the Fed raises interest rates, traditional investment asset classes, such as bonds and other fixed-income assets, become more attractive to investors due to stable returns. In turn, investors move funds away from volatile assets such as crypto, leading to decreased demand and potentially causing price corrections or declines.
The market becomes more risk-tolerant once interest rates are brought down, and money starts flowing again into the equity and crypto markets from the less volatile asset classes.
The Fed began tightening interest rates in March 2022 amid growing inflation, hiking them from as low as 0%-0.25%, with the most recent increase in July. However, with expected rate cuts in the next year, along with the Bitcoin halving set for April, this could be s a perfect catalyst post-halving.
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